2 price determination in a competitive market Flashcards
competitive market definition
a market in which a large number of buyers and sellers posses good market information and can easily enter or leave the market
equilibrium price definition
the price at which planned demand for a good or service exactly equals planned supply
supply definition
the quantity of a good or service that firms are willing and able to sell at given prices in a given time period
demand definition
the quantity of a good or service that consumers are willing and able to buy at given prices in a given time period.
- for economists demand is always effective demand
effective demand definition
the desire for a good or service backed by the ability to pay
market demand definition
the quantity of a good or service that all the consumers in a market are willing and able to buy at different market prices
condition of demand definition
a determinant of demand, other than the good’s own price, that fixes the position of the demand curve
increase in demand definition
a rightward shift of the demand curve
decreases in demand definition
a leftward shift of the demand curve
normal good definition
a good for which demand incre4ases as income rises and demand decreases as income falls
inferior good definition
a good for which demand decreases as income rises and demand increases as income falls
market definition
a voluntary meeting of buyers and sellers to buy and sell goods and services
when do markets become competitive markets
when there are a large number of buyers and sellers passively accepting the equilibrium price
why is it easy for new businesses to enter a highly competitive market
due to a lack of barriers of entry and exit
what are 3 things within a competitive market
- low barrier to enter
- low exit barrier
- transparency (everyone can see what everyone else is doing)
individual demand definition
the quantity of a good or service that an individual consumer in a market is willing and able to buy at different market prices
how to work out market demand
add up all individual demand within the market
law of demand definition
inverse relationship between price and quantity demanded
as a good’s price falls, more is demanded
what is on the x and y axis of a demand curve
y axis = price
x axis = quantity demanded
\ because inverse relationship
movement along the demand curve definition
takes place when the good’s price changes
extension of demand definition
movement down the demand
- price falls
- increases demand
contraction of demand definition
movement up the demand curve
- price increases
- decreases demand
ceteris paribus definition
assuming that all other variables are unchanged/constant
what are the 6 conditions of demand
- the prices of substitute goods (competing demand)
- the prices of complementary goods (joint demand)
- personal income
- tastes and preferences
- population size, which influences total market size
- successful advertising campaign
for a normal good what happens when disposable income increases
demand increases
- rightward shift of demand
for a normal good what happens when disposable income decreases
demand decreases
- leftward shift of demand
for inferior goods what happens when disposable income increases
demand decreases
- leftward shift in demand
for an inferior good what happens when disposable income decreases
demand increases
- rightward shift in demand
elasticity definition
the proportionate responsiveness of a second variable to an initial change in the first variable
price elasticity of demand definition
measures the extent to which the demand for a good changes in response toa change in the price of that good
what are the 5 factors determining price elasticity of demand
- substitutability
- percentage of income
- necessities or luxuries
- width of the market
- time
income elasticity of demand definition
measures the extent to which the demand for a good changes in response to a change in income
cross-elasticity of demand definition
measures the extent to which the demand for a good changes in response to a change in the price of another good
market supply definition
the quantity of a good or service that all firms plan to sell at given prices in a given time period
profit definition
the difference between total sales revenue and total costs of production
total revenue definition
the money a firm receives when selling its output, calculated by multiplying price by quantity sold
conditions of supply definition
determinants of supply, other than good’s own price, that fix the position of the supply curve
increase in supply definition
a rightward shift of the supply curve
decreases in supply definition
a leftward shift of the supply curve
price elasticity of supply
measure the extent to which the supply of a good changes in response to a change in the price of that good
3 demand elasticities
- price elasticity of demand
- income elasticity of demand
- cross-elasticity of demad
price elasticity demand formula
percentage change in quantity demanded / percentage change in price
income elasticity of demand formula
percentage change in quantity demanded / percentage change in income
cross-elasticity demand formula
percentage change in quantity of good A demand / percentage change in price of good B
5 demand curves need to know
- perfectly elastic demand
- elastic demand
- unit elastic demand
- inelastic demand
- completely inelastic demand
what are the values of PED for perfectly elastic demand
PED = infinity
what are the values of PED for elastic demand
PED > 1
what are the values of PED for unit elastic demand
PED = 1
what are the values of PED for inelastic demand
PED < 1
what are the values of PED for completely inelastic demand
PED = 0
how does substitutability effect price elasticity of demand
(factors determining price elasticity of demand)
- very close substitute, high elasticity (sprite and 7 up)
- no substitute more likely to be inelastic
how does percentage of income effect the price elasticity of demand
(factors determining price elasticity of demand)
- big income purchase = more elastic, because it would cost a lot more of the income if price increased slightly
- low income purchase like chocolate = more inelastic, goes up 20p doesn’t matter
how does necessities or luxuries effect the price elasticity of demand
(factors determining price elasticity of demand)
if no close substitue
- demand for necessities inelastic
- demand for luxuries inelastic
if close subsititute
- demand for necessities elastic
- demand for luxuries little elastic
how does the width of the market definition determine price elasticity of demand
(factors determining price elasticity of demand)
the wider the market definition the lower the price elasticity of demand is
e.g the demand for bread produced by one baker is more elastic than all the bread produced by all the bakeries
how does time effect the price elasticity of demand
(factors determining price elasticity of demand)
for many goods and services:
- demand is more elastic in the long-run, because it takes time to respond to change
but
- short-run if petrol suddenly rose, people would respond fast
how to tell if price is inelastic or elastic without the formula
- total consumer expenditure increases in response to a price fall, demand is elastic
- total consumer expenditure decreases in response to a price fall, demand is inelastic
- total consumer expenditure remains constant to price fall, demand is unitary
income elasticity is always negative for…
an inferior good
because quantity demanded falls as income rises for an inferior good
income elasticity is always positive for
a normal good
because quantity demanded rises as income rises for a normal good
what are the 2 types of goods a normal good is made up of
- luxury goods
- basic goods
what are the values of income elasticity for luxury goods
greater than +1
what are the values of income elasticity for basic goods
lying between 0 and +1
as income rises the demand for a normal good…
rises
as income rises the demand for a luxury good…
(parts of a normal good)
rises proportionally
as income rises the demand for a basic good…
(parts of a normal good)
rises at a slower rate however
what are the 3 possibilities of cross-elasticity of demand
- complementary goods (joint demand
- substitutes (competing demand)
- no demand relationship
what is the x and y axis of a supply curve
y axis = price
x axis = quantity supplied
/ due to being directly proportional
what are the 4 conditions of supply
- costs of production
- technical process
- taxes imposed on firms
- subsidies granted by the government to firms
what are the 4 features of costs of production
- wage costs
- raw material costs
- energy costs
- costs of borrowing
what is the formula for price elasticity of supply
percentage change in quantity supplied / percentage change in price
what are the 5 supply curves you need to know
- perfectly elastic supply
- elastic supply
- unit elastic supply
- inelastic supply
- perfectly inelastic supply
what are the 5 factors determining price elasticity of supply
- length of the production period
- availability of spare capacity
- ease of accumulating stocks
- the ease of switching between alternative methods of production
- the number of firms in the market and the ease of entering the market
- time
how does the length of the production period effect the price elasticity of supply
5 factors determining price elasticity of supply
firms convert raw materials into goods quickly supply = more elastic
how does the availability of spare capacity effect price elasticity of supply
5 factors determining price elasticity of supply
spare capacity can produce more and work at full capacity in short-term to react quickly to a change in demand
how does the ease of accumulating stock effect price elasticity of supply
5 factors determining price elasticity of supply
firms can react to a change in demand due to unsold goods being stored cheaply
how does the ease of switching between alternative methods of production effect the price elasticity of supply
5 factors determining price elasticity of supply
easier to switch more elastic supply is
- because if demand increased switch to capital production more than labour and constantly produce without tiring or needing breaks
how does the number of firms in the market and the ease of entering the market effect the price elasticity of supply
5 factors determining price elasticity of supply
more firms in the market, easier to enter and leave, the greater the elasticity of supply
how does time effect the price elasticity of supply
5 factors determining price elasticity of supply
- short-run if able to react quickly is elastic but not as elastic as long-run
- takes time to react to change, so long-run is more supply elastic if demand is long-lasting
equilibrium definition
a state of balance between opposing forces
disequilibrium definition
a situation in a market when there is excess supply or excess demand
market equilibrium definition
unless some event disturbs the equilibrium there is no reason for the price to change
when is a market in equilibrium
when planned demand = planned supply
- and there is no excess demand or supply
market disequilibrium definition
exists at any price other than equilibrium
when is a market in disequilibrium
when planned demand doesn’t = planned supply
- excess demand or supply
excess supply definition
when firms wish to sell more than consumers which to buy,
- price falls to meet at new equilibrium
excess demand definition
when consumers wish to buy more than firms wish to sell
- price rises to meet at new equilibrium
joint supply definition
when one good is produced, another is also produced from the same raw materials
competing supply definition
when raw materials are used to produce one good they cannot be used, to produce another good
example of 2 goods in joint supply
market for beef and market for leather
example of 2 goods in competing supply
food and biofuels
complementary good definition
a good in joint demand,
- a good which is demanded at the same time as the other good
substitute good definition
a good in competing demand, namely a good which can be used in place of the other good
composite demand definition
demand for a good which has more than one use
derived demand definition
demand for a good which is an input unto the production of another good
example of complementary good
sony consoles, sony games
example of substitute goods
sony consoles and xobx consoles
speculative good definition
The decision to buy a good is based on the expectation that the prices are expected to rise rather than for the purpose of consuming the good itself
veblen good definition
A good that enjoys “snob appeal” i.e. the goods become more attractive as price rises because few people can afford to buy the goods e.g. designer goods.
explain the market for lemons
look up video econplus dal or ezyeconomics
allocative efficiency definition
occurs when the available economic resources are used to produce the combination of goods and services that best matches people’s tastes and preferences
productive efficiency definition
for the economy as a whole occurs when it is impossible to produce more of one good without producing less of another.
what is productive efficiency for a firm definition
when the average total costs of production is minimised
merit good definition
a good which when consumed leads to benefits which other people enjoy, or a good for which the long-term benefit of consumption exceeds the short-term benefit enjoyed by the person consuming the good
how can a merit good be determined
through valued judgement
what is one often negative of a merit good
both under-consumed and under-provided for
why are merit goods underprovided for and under-consumed
because they are too expensive
e.g healthcare is too expensive for some so they don’t pay it and take the risks
